When considering the Forbes financial valuations, accounting is important.
Recently, Forbes came out with their franchise valuations based on numbers from the 2017 season. The Pirates ranked #18 in baseball with a $1.26 billion valuation and possessed an estimated $35 million Operating Income. These are two values fans will hang their hats on when they want to complain about the Pirates spending habits, but I have several problems with this line of thinking:
Forbes is Just Guessing
First, let me say, I like Forbes. They write about business, I enjoy business, and I enjoy their content. I ?m sure they work hard, but that does not mean they have enough information to properly value a team, and this goes for all teams, not just the Pirates. Their write up on the process states that to come up with their totals they ?speak with sports bankers, team executives and industry analysts, ? as well as ?review team documents and stadium leases to the extent [they] can get [their] hands on them. ? This wording isn ?t on accident.
As many fans know ?and are frustrated by ?sports teams are private entities. This means that they are not publicly traded and are not required to share their financials publicly, and this is evident as per the CBA. The agreed upon ?Confidentiality Agreement Attachment 14 or Page 193 ?stipulates the following:
- The MLBPA acknowledges financial information is confidential, and they agree to keep it as such.
- Financial documents can only be used to determine compliance with the ?Basic Agreement ? and nothing else.
- Financials are only available to those who are responsible for determining compliance, such as attorneys and their staff, the MLBPA, outside experts (accountants, economists, etc.), players, and agents.
- Appropriate procedures must be determined and kept regarding the use and control of all financials.
This is only a summary, as the actual agreement is quite weighty, but it ?s clear the document makes no mistake that financials can only be used for certain purposes. This is why the leaked financials of the Pirates ?and others ?caused such an uproar in 2010; teams don ?t want the public to have this information. Is this partly because they don ?t want fans, media, or other concerned parties to know just what their financial standings truly are? That ?s probably part of it, but that ?s currently within their rights.
As for Forbes, calling it ?guessing ? may be a bit harsh, but personally, when making a strict value judgement on the Pirates financial standing ?or anything really ?I want the whole picture. Financial statements can tell you that, but Forbes probably can ?t. Even if their valuations are somewhat close, it ?s not as if they mean anything.
Team Value Means Nothing
Many upset fans will point to the $1.26 billion valuation as if it means something; as if the Pirates ?or better yet, Bob Nutting ?have $1.26 billion in the bank that they can freely spend as they see fit. This is simply not what franchise value means. Compare this to the value of personal assets that are more relatable, like a home or 401(k). If the value of these go up or down based on the market, it doesn ?t mean the owner has more or less money to spend out of pocket, it just means the asset is worth more or less when it comes time to liquidate. On a not completely unrelated note ?to take out equity of an asset like this to cover personal expenses would be bad personal finance and the same is true for the Pirates.
Recent proof of the meaningfulness of these values can come from the sale of the Marlins. In last season ?s iteration of this exercise, Forbes valued the Marlins at $940 million in April 2017; they sold for $1.2 billion in September 2017.
It ?s too simplified to say these franchise values are ?made up ?; Forbes explains their process, and it is mostly solid. The validity of their figures has already been brought into question, but to a greater point, the value really doesn ?t matter until it comes time to sell. At that time, the value is basically what a purchasing group is willing to pay for it, or frankly, what MLB would like it to sell for.
Final selling prices will largely depend on ?goodwill, ? an accounting term that states while there are many aspects of a business that have value, there are also aspects to a business that can ?t be valued. In baseball, this could be stadium location, fan base, or recent history of success, and this is something Forbes obviously can ?t measure. When it comes time to sell, how much ?or how little ?goodwill the team is perceived of having will affect the selling price, and as we ?ve seen the Marlins, even the teams that are considered the worst off are still extremely valuable in a business sense.
Sure, the Pirates may be roughly worth $1.26 billion, and they may not. Honestly, it means very little when it comes to attacking or defending how the Pirates run their business.
Operating Income is Different from Net Income
Finally, even if fans don ?t cite the franchise value, many will certainly bring up the $35 million Operating Income and suggest the Pirates had that much more to spend on payroll but chose to pocket it instead. This isn ?t necessarily true, either.
Assuming this amount is representative ?and as stated above, it may not be ?the importance of Operating Income versus Net Income must be stressed.
It is true that many companies calculate Operating Income differently ?Forbes cites its calculation as ?earnings before interest, taxes, depreciation and amortization, ? (or EBITDA) whereas depreciation and amortization is often factored in for other calculations. Either way, Operating Income is only looking at business operations, while Net Income takes all accounting and financing decisions into account, and it ?s this total that will be rolled into Retained Earnings at year-end (or ?pocketed, ? if you want to use that misnomer). No one financial indicator is going to paint the entire picture of a business; many factors need considered when determining financial health. The goal for this exercise, however, is not to determine the financial stability of the Pittsburgh Pirates.
While these differences are important, try not to get lost in the accounting jargon. The main point is that whatever the Pirates truly made in relation to the Forbes $35 million is going to be less. Forbes acknowledges their calculation doesn ?t include interest, taxes, depreciation, and amortization. These are all expenses the Pirates would have to pay and recognize, which obviously means that amount is too high. I have no idea how much of these respective expenses a baseball team would have to identify, but my guess is it would be a sizeable chunk of the $35 million.
The bottom line (pun intended) is that it ?s disingenuous to say definitively that the Pirates made $35 million in 2017, as that theoretical figure would be much less with everything accounted for.
My goal here is not to absolve the Pirates of anything ?as I said, these same arguments can and should be made for every team ?rather, it ?s to educate on the business side of baseball and to factor that important aspect into the argument. In my opinion, the Forbes numbers are interesting and a good reference point, but to base entire stances on them is somewhat foolhardy. These arguments are largely unsound or incomplete from a financial perspective, and while I ?m a Pirates fan, sound reasoning and financial theory are where my allegiances truly lie.